Minnesota set out to be a leader in broadband with its Border-to-Border grants, but access remains elusive in many rural areas

Ted Krause gave up his nights and weekends for several months last year to spearhead a grassroots broadband petition drive in rural Sunrise Township, about an hour north of Minneapolis. Sometimes he or other volunteers drove down the same long driveways several times to catch someone at home. He said no one refused to sign, even when he told neighbors that getting high-speed internet service would probably raise their property taxes.

Mark Erickson of Winthrop attended more than 100 community meetings over the past five years as he gathered support in southern Minnesota to build a broadband network that could eventually serve more than 6,000 households, businesses and farms.

Going beyond the call of duty to secure broadband internet service is often necessary in rural areas of the Ninth District. While cable and telecom providers offer internet download speeds of 100 megabits per second (Mbps) or higher in metro areas, basic broadband service—defined as at least 25 Mbps download, 3 Mbps upload by federal regulators—is unavailable to rural households in many parts of the state.

Such speeds often require an optical fiber connection, but it’s difficult for telecom firms to justify laying expensive fiber infrastructure in sparsely populated places. “There are areas where you just can’t make a business case to provide broadband,” said Brent Christensen, CEO of the Minnesota Telecom Alliance, a trade association.

As the internet has become an essential utility for most Americans, necessary for everything from finding a job and doing homework to keeping up with the grandkids via Skype, broadband access has come to be viewed as key to improving standards of living and stimulating economic development, especially in rural areas.

Over the past two decades federal, state and local governments have intervened in telecom markets to bring high-speed internet service to unserved or underserved areas.

More than any other district state, Minnesota has striven to extend the reach of broadband. The Border-to-Border Broadband Development Grant Program, administered by the state Department of Employment and Economic Development (DEED), has dispensed $65 million to internet providers over the past three years to support broadband projects across the state. By subsidizing the upfront cost of broadband infrastructure in areas still off the broadband map, the grants have helped to make high-speed internet service available to nearly 26,000 households and more than 3,100 businesses around the state.

But despite coverage gains under the program, a yawning urban-rural broadband gap remains. And this spring the Minnesota Legislature cut the Border-to-Border program by over 40 percent, allocating $20 million for the next round of grants (applications are due in September) and nothing for next year.

The cuts represent another swing of the pendulum in a national debate about the role of government in fostering broadband development. Are taxpayer-funded grants, loans and other subsidies the best way to ensure that rural residents aren’t bypassed by the information superhighway?

The Border-to-Border program is a case study of what can be accomplished with a modicum of state funding—and the challenges of overcoming long-standing barriers to broadband deployment in rural areas.

A slow country road

As a business proposition, providing broadband in areas with few people has never made sense. The cost of laying glass fiber ranges from $10,000 to $30,000 per mile, depending on terrain. Connecting one farm to the high-speed-network can cost as much as $10,000, said Bill Coleman, a broadband consultant who has advised on projects all over Minnesota.

Nineteen counties in Minnesota have population densities below five households per square mile, and broadband adoption rates—the share of households that subscribe to available service—are typically lower in rural areas than in urban areas because of lower incomes and higher proportions of less educated, elderly and seasonal residents.

With high upfront costs and few potential customers per mile, “you can’t generate revenue to cover the cost” of installing broadband infrastructure in many rural areas, Christensen said. Most internet providers in Minnesota charge standard monthly rates for broadband service—$40 to $55 a month for download speeds of about 25 Mbps. Theoretically, those in thinly populated areas could opt to charge more to cover installation and operating costs, but in practice most keep their prices within a certain range. “If you charged the customer what it cost for broadband, they’d never pay for it,” said Christensen, a provider himself.

Alternatives to wireline broadband often deliver lower speeds or are more expensive. Fixed wireless networks require transmission towers as well as fiber connections, and obstacles such as hills and trees can interfere with the signal, Coleman said. Cell phone service is slow and coverage often spotty outside metro areas, while satellite links are pricey and vulnerable to weather disruptions.

These economic and technological realities have created a sharp divide between urban and rural areas when it comes to broadband access (see Chart 1). In 2014, access to high-speed internet service outside urbanized areas lagged overall access nationwide and in every district state, according to the latest available data from the Federal Communications Commission.

Estimates by Connected Nation, a national nonprofit that has assisted several states with broadband mapping, indicate that rural broadband access has increased since then in Minnesota. But a state map based on December 2016 Connected Nation data shows large swaths of territory with limited access to the internet at 25 Mbps download—a minimum broadband standard set by the FCC in 2015. About 27 percent of rural households in Minnesota lacked that level of wireline internet access at the end of 2016, according to Connected Nation, although availability is greater at lower speeds and via different technologies (see Chart 2).

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(A patchwork of high-speed coverage exists throughout the district, but recent data aren’t available for most areas of district states.)

Thin broadband coverage has persisted in rural areas of Minnesota and other states despite billions of dollars in federal subsidies for broadband expansion over the past decade (see “A little help for rural broadband”).

Championing broadband

Minnesota policymakers have been pushing for faster and more extensive internet access since the mid-1990s, when the state Legislature funded broadband connections for public libraries, schools and colleges.

In 2010, state lawmakers responded to calls from the Blandin Foundation and other organizations for greater investment in broadband by setting a state internet speed goal: All residents should have access to broadband at a minimum speed of 10 Mbps download and 5 Mbps upload by 2015. (Upload speed is important for business applications, such as sharing large data files or posting software updates.)

Three years later the state opened the Office of Broadband Development (OBD) within DEED. The office pressed for faster and broader internet access deployment, framing broadband as an economic development tool. A much-cited 2009 study found that higher broadband penetration contributed significantly to faster economic growth. (Subsequent studies have also shown the salutary effect of rural broadband on economic output; a 2016 analysis by the Hudson Institute found that rural broadband providers supported over $100 billion in e-commerce in 2015.)

The Legislature authorized $20 million for the first round of Border-to-Border grants in 2014. “It really was envisioned as an incentive program” intended to spur private investment, said Danna MacKenzie, the OBD’s executive director. “We’ve laid out this goal, and we recognize we’re looking for infrastructure to be extended out to places that haven’t made financial sense in the past. So what do we need to bring to the table to close that gap?”

Last year the state goal of universal access to broadband at 10 Mbps download was replaced by a higher two-tiered goal: that all Minnesotans have access to broadband at the FCC benchmark of 25 Mbps download by 2022, and to 100 Mbps by 2026.

Unlike most federal grant programs, the Border-to-Border program is a matching grant program; applicants must put some skin in the game, matching state funds at least dollar for dollar. The OBD estimates that the $65 million disbursed so far has leveraged nearly $82 million in matching investment, most of it by broadband providers and local governments.

The Border-to-Border program is unique in the region for its size and scope. Only a half-dozen states around the country have similar grant initiatives. Wisconsin has a matching grant program using federal funds that has been capped at $1.5 million annually.

To receive funding, Minnesota projects must be financially and technically viable, and capable of being scaled up to 100 Mbps (a requirement that excludes some technologies). Awards are capped at $5 million, to help ensure that funds are distributed around the state, mostly in unserved areas.

Applications flooded in for the first round of Minnesota’s grants, and the Legislature appropriated another $11 million in grant funds for 2015 and $35 million in 2016. The first two rounds of projects are wrapping up, MacKenzie said, and this spring work began on projects supported by the latest crop of grants, which were awarded in January.

The 42 new grants are scattered across the state and subsidize projects by about two dozen providers, among them national telecom carriers, cable franchises, internet service providers and local telephone cooperatives. Ten projects involve partnerships with local governments, most often counties. (See this OBD map for locations and recipients of 2016 awards.)

Into the internet wild

The Border-to-Border program has proved a catalyst for rolling out broadband in remote areas of Minnesota by covering part of the upfront cost and thus reducing the price paid by subscribers. Often a state grant is the capstone of a financing package drawn from multiple sources, public and private—the final piece that elevates a rural project from pipe dream to reality.

Without such support the price of broadband service in many rural areas would be “exponentially higher,” said Gary Johnson, CEO of Paul Bunyan Communications, a telecom cooperative in northern Minnesota.

Paul Bunyan, based in Bemidji, boasts one of the nation’s largest 1 gigabit-per-second (Gbps) networks, despite serving a 5,000-square-mile territory that includes some of the state’s least-populated counties.

Paul Bunyan has borrowed over $100 million from the U.S. Department of Agriculture’s Rural Utilities Service since 2004 to build out its fiber network. In comparison, the two Border-to-Border grants it has received are small potatoes: $2 million in 2015 to extend its network to parts of central Itasca County and $1.7 million this year to serve other parts of Itasca, Hubbard and Becker counties.

But Johnson said the additional funding provided by the state grants was crucial to deliver broadband to the least populated, hardest-to-serve areas of those counties. As a co-op owned by its members, Paul Bunyan can tolerate lower and slower financial returns than many firms beholden to private investors, but “even at our lower bar for investment, these areas would not be doable without these grant dollars,” he said.

The 2015 project made broadband available to about 1,200 households, 50 businesses and a handful of community institutions, including a local clinic run by a hospital in Bigfork. Paul Bunyan, Itasca County and the Iron Range Resources and Rehabilitation Board, a state agency that promotes economic development in northeastern Minnesota, put up the balance of the $5.5 million total project cost.

This year’s grant will deliver similar access to 950 unserved and underserved households and businesses. Itasca County again chipped in part of $2.2 million in matching funds.

Better than a gravel road

Increasingly, local governments are taking on the risk of deploying broadband in rural areas where private firms decline to provide service. In Sunrise Township, the prospect of landing a $1 million Border-to-Border grant last year provided the impetus for $560,000 in municipal bonding to secure high-speed broadband service for the community.

CenturyLink had received federal funding to upgrade internet access in the township to a minimum of 10 Mbps—what Coleman calls the digital equivalent of a gravel road—but residents and local businesses wanted something better. This year CenturyLink, which provides internet service in two thirds of the township, plans to install a $2.4 million fiber-to-the-home (FTTH) system supporting internet speeds as high as 1 Gbps.

Community leaders wanted the township to issue bonds to help pay for the project, but before it would do so at least half of local property owners in CenturyLink’s service area had to agree to the creation of a special service district for the purpose of repaying bond debt. Hence last year’s petition drive headed by Krause, a log-home builder who looks forward to the day when he can Skype with prospective customers without enduring three- to four-second lag times.

Residents of the special service district expect to pay about $120 a year in tax assessments over the next 10 years to retire the bonds, but Krause estimates that those who subscribe to CenturyLink’s service will save $75 monthly on average in data fees currently charged by cellular and satellite internet providers. “That’s money that could end up in the local economy,” he said.

Other Minnesota broadband initiatives that have received Border-to-Border grants include an ambitious initiative in southern Minnesota to build a $50 million fiber and wireless network covering over 800 square miles of farm country, and a much smaller effort to serve a few hundred homes and businesses in a rural area of west-central Minnesota.

The southern Minnesota project is another example of collective action by local government in pursuit of broadband. Communities in the Minnesota River Valley had repeatedly pressed telephone and cable companies to upgrade internet service in the region, to no avail. Eventually, 27 cities and townships in and around Renville and Sibley counties formed their own broadband cooperative, known as RS Fiber.

A $1 million Border-to-Border grant awarded in 2015 helped build momentum for municipal bonding and lending to fund FTTH connections to six small cities, with four more to come by the end of this year. A second grant this year will cover somewhat less than half the cost of an additional fiber loop serving outlying townships.

Future expansion of the network, operated by Winona-based Hiawatha Broadband, is slated to bring fiber to the farm in 17 rural townships by the early 2020s.

In Holmes City, a township near Alexandria, two Border-to-Border grants are helping to bring 1 Gbps internet service to about 360 homes and 50 businesses in the area. Beneficiaries of the $1.8 million project, led by the Runestone Telecom Association, include schoolchildren who previously couldn’t go online to do their homework.

Broadband dreams deferred?

Two and a half years after the first Border-to-Border grants were awarded, it’s difficult to gauge the impact of the grant program on broadband access in Minnesota.

There’s little doubt that the grants have opened up the full potential of the internet for many rural communities that have tried for years to secure broadband service from a private provider and have come up short. New state broadband coverage maps and other data show pockets of progress. Places like Big Stone, Rock and Swift counties in western Minnesota where broadband coverage was uneven a year ago now have nearly seamless internet access at the FCC benchmark.

Rural communities have long depended on government subsidies to help pay for telecom servicesRead more

If not for the grants, communities in these areas and others around the state might have had to settle for a lower level of broadband access, or none at all.

Many rural communities view broadband as essential for attracting businesses and young workers, and there’s anecdotal evidence that new economic activity has followed the provision of broadband in grant communities. For example, a college of osteopathic medicine is expected to open within two years in Gaylord, a city of 2,300 that is the largest community in RS Fiber’s service area. Mark Erickson, economic development director for the city of Winthrop, said the medical school would have gone elsewhere if broadband service had not been available in the city.

But the Border-to-Border grant program’s impact to date has been modest in terms of bridging the urban-rural broadband divide. The households counted by the OBD as gaining broadband access due to the grants amount to only 11 percent of the over 240,000 rural Minnesota households that Connected Nation estimates lacked wireline access to the internet at 25 Mbps or higher at the end of last year.

Regardless of the effect of the Border-to-Border grants on individual communities or the state as a whole, such programs raise questions about the use of public subsidies to foster broadband development in sparsely populated areas. Considering the costs of current broadband technologies, subsidizing the provision of broadband to every town and hamlet may not be fiscally practicable—or desirable.

Some telecom firms have objected to the Border-to-Border program on the grounds that it tilts the playing field against providers who didn’t receive grants (the grant process permits providers to challenge awards to competitors). Economic research has shown that government grants, loans and other assistance can “crowd out” private investment. In the case of the broadband market in Minnesota, it’s possible that some communities that received grants would have gotten an internet upgrade without state assistance.

Filling all the coverage gaps on the Minnesota broadband map—achieving the state’s goal of universal internet access at 25 Mbps or above within five years—would likely require larger subsidies for broadband deployment provided by federal agencies, the state or local governments.

Such a commitment may be difficult for lawmakers, given other public spending priorities, such as education, health care and highway maintenance. In considering continued funding for the Border-to-Border grant program they must weigh equity—the notion that all state residents are entitled to the benefits of broadband—against the costs of subsidizing the service.

Because of that tension in public policy, the urban-rural digital divide is likely to persist in Minnesota, deferring the dream of universal access.